Energy suppliers must share savings made through falling wholesale gas prices

With wholesale gas in November 2015 costing just 53 per cent of what it did in January 2014, and retail gas prices only 7 per cent lower, prices must be cut significantly now, says Andrew Hallett.

Consumers have heard endless arguments over the past few years about the link between wholesale and retail energy prices – not all of them useful. If we want to escape this back and forth over the price of winter fuel bills, we should start comparing apples with apples.

For starters, not everyone is on mains gas (or uses electricity for heating). In Britain, 1.5 million households burn heating oil to stay warm. They do not benefit from Ofgem regulation and they must spend time ringing around to obtain the best quote – assuming a sufficient number of firms are willing to deliver to their perhaps remote property in the first place. Indeed, this and profiteering allegations led the then Office of Fair Trading to investigate the heating oil market in 2011.

It all comes back to oil and gas at the wholesale level, of course. Crude has been on the slide for around two years and in most markets this has had myriad benefits for consumers – witness the price of petrol on the forecourt. You can see from the rebased chart below the pass-through into heating oil (kerosene) at the retail level. According to Department of Energy and Climate Change (Decc) numbers, by November 2015 it was just 58 per cent of the January 2014 per litre price, mostly due to crude oil entering the UK costing 56 per cent less over the same period.

Piped gas is an altogether different matter. Unsurprisingly, wholesale gas prices (as measured by Icis) have followed crude oil prices downwards pretty consistently. This chart uses year-ahead, but the same falls are evident across all the different contract lengths. Even more pronounced than oil, in November 2015 wholesale gas was trading at just 53 per cent of its January 2014 value. Yet those falls have not led to a significant impact on retail gas prices, again as recorded by Decc. Look at the consistent, almost horizontal red marking retail gas prices. This puts in context the price reductions offered by energy suppliers over the past two years. Despite wholesale price falls and only limited changes in other costs, retail gas offerings are only 7 per cent down on January 2014. Domestic energy consumers have so far been excluded from the benefits of the commodities slump, a slump that market signals suggest will carry on well into 2016. In this context, the recent 5 per cent cuts by four of the big six for average users are a welcome yet small step back to where prices need to be.

Suppliers point out the theoretical availability of very much cheaper fixed deals obtained via online search efforts by some consumers. But 70 per cent of consumers, disproportionately on lower incomes, sit on more expensive variable deals. Rather than passing on the proceeds of cheaper gas solely to the active switchers on fixed-term deals, suppliers should make the long-overdue adjustment to their variable tariffs, passing through the savings they have been banking for the past two years.

It is because of the difficulty of engaging vulnerable consumers that Citizens Advice has proposed a targeted backstop tariff in its submissions to the Competition and Markets Authority energy market investigation. In this reform, those in a defined and broadly vulnerable group would be automatically charged their supplier’s cheapest tariff price. This would effectively remove these “sticky” consumers from the competitive market and maximise their interests in a more direct way. It would also de facto transfer back the hedging and other risks onto the supplier, rather than demanding consumers make difficult predictions about future price movements.

We also play a big part (through events such as Big Energy Saving Week) in encouraging potentially more engaged consumers to switch to get better deals. Energy Best Deal, run by us with Ofgem and large supplier support, is aimed at low-income consumers who have not switched before. Our staff help people at risk of fuel poverty with issues such as fuel debt, benefits entitlement and energy efficiency.

Generally, we recognise in aggregate the benefits of market innovation and competition in delivering comparatively cheap energy. What is more troubling is that the essential service, this homogeneous good, is being priced to different people at unacceptable differentials.

Suppliers’ arguments are no longer defensible. Competition at the fringes is not a substitute for savings for all consumers. The contrast between the falls in commodity costs and the tiny drops in retail prices is clear evidence that suppliers are failing their customers. Regardless of any medium-term reforms, the immediate price issue comes down to energy suppliers not passing on the wholesale price falls they have enjoyed for months onto the bulk of their customers. We join the prime minister and Ofgem in saying there need to be significant price cuts, now, for all customers.

Andrew Hallett, policy manager,
Citizens Advice

Suppliers must share savings
With wholesale gas in November 2015 costing just 53 per cent of what it did in January 2014, and retail gas prices only 7 per cent lower, prices must be cut significantly now, says Andrew Hallett.
Consumers have heard endless arguments over the past few years about the link between wholesale and retail energy prices – not all of them useful. If we want to escape this back and forth over the price of winter fuel bills, we should start comparing apples with apples.
For starters, not everyone is on mains gas (or uses electricity for heating). In Britain, 1.5 million households burn heating oil to stay warm. They do not benefit from Ofgem regulation and they must spend time ringing around to obtain the best quote – assuming a sufficient number of firms are willing to deliver to their perhaps remote property in the first place. Indeed, this and profiteering allegations led the then Office of Fair Trading to investigate the heating oil market in 2011.
It all comes back to oil and gas at the wholesale level, of course. Crude has been on the slide for around two years and in most markets this has had myriad benefits for consumers – witness the price of petrol on the forecourt. You can see from the rebased chart below the pass-through into heating oil (kerosene) at the retail level. According to Department of Energy and Climate Change (Decc) numbers, by November 2015 it was just 58 per cent of the January 2014 per litre price, mostly due to crude oil entering the UK costing 56 per cent less over the same period.
Piped gas is an altogether different matter. Unsurprisingly, wholesale gas prices (as measured by Icis) have followed crude oil prices downwards pretty consistently. This chart uses year-ahead, but the same falls are evident across all the different contract lengths. Even more pronounced than oil, in November 2015 wholesale gas was trading at just 53 per cent of its January 2014 value. Yet those falls have not led to a significant impact on retail gas prices, again as recorded by Decc. Look at the consistent, almost horizontal red marking retail gas prices. This puts in context the price reductions offered by energy suppliers over the past two years. Despite wholesale price falls and only limited changes in other costs, retail gas offerings are only 7 per cent down on January 2014. Domestic energy consumers have so far been excluded from the benefits of the commodities slump, a slump that market signals suggest will carry on well into 2016. In this context, the recent 5 per cent cuts by four of the big six for average users are a welcome yet small step back to where prices need to be.
Suppliers point out the theoretical availability of very much cheaper fixed deals obtained via online search efforts by some consumers. But 70 per cent of consumers, disproportionately on lower incomes, sit on more expensive variable deals. Rather than passing on the proceeds of cheaper gas solely to the active switchers on fixed-term deals, suppliers should make the long-overdue adjustment to their variable tariffs, passing through the savings they have been banking for the past two years.
It is because of the difficulty of engaging vulnerable consumers that Citizens Advice has proposed a targeted backstop tariff in its submissions to the Competition and Markets Authority energy market investigation. In this reform, those in a defined and broadly vulnerable group would be automatically charged their supplier’s cheapest tariff price. This would effectively remove these “sticky” consumers from the competitive market and maximise their interests in a more direct way. It would also de facto transfer back the hedging and other risks onto the supplier, rather than demanding consumers make difficult predictions about future price movements.
We also play a big part (through events such as Big Energy Saving Week) in encouraging potentially more engaged consumers to switch to get better deals. Energy Best Deal, run by us with Ofgem and large supplier support, is aimed at low-income consumers who have not switched before. Our staff help people at risk of fuel poverty with issues such as fuel debt, benefits entitlement and energy efficiency.
Generally, we recognise in aggregate the benefits of market innovation and competition in delivering comparatively cheap energy. What is more troubling is that the essential service, this homogeneous good, is being priced to different people at unacceptable differentials.
Suppliers’ arguments are no longer defensible. Competition at the fringes is not a substitute for savings for all consumers. The contrast between the falls in commodity costs and the tiny drops in retail prices is clear evidence that suppliers are failing their customers. Regardless of any medium-term reforms, the immediate price issue comes down to energy suppliers not passing on the wholesale price falls they have enjoyed for months onto the bulk of their customers. We join the prime minister and Ofgem in saying there need to be significant price cuts, now, for all customers.
Andrew Hallett, policy manager,
Citizens Advice